Backup Withholding: When You Must Withhold 24% From a Sub

What backup withholding is

Most payments to a sub carry no withholding: you pay the invoice, and the 1099-NEC tells the IRS what you paid. That only works if the IRS can tie the payment to a taxpayer. When it can’t, the law moves collection to the payer. You withhold 24% of each reportable payment, the rate in force since 2018, and send it to the IRS as federal income tax on the sub’s behalf.

The IRS runs two programs, and only the first one is a GC’s problem:

• Missing or incorrect TIN (the IRS calls it BWH-B): the payee didn’t give you a correct taxpayer identification number. This covers payments for work done as an independent contractor, reported on Form 1099-NEC, and attorneys’ fees.
• Under-reported interest and dividends (BWH-C): the IRS tells a payer of interest or dividends to withhold. Banks and brokers deal with this one, not GCs paying subs.

The withheld money isn’t lost to the sub. They claim it as tax withheld on their own return, the same way an employee does. That’s worth telling a sub who thinks you’re keeping it.

A missing TIN

A TIN is missing when the sub hasn’t given you one, or when the one they gave is obviously wrong: more or fewer than nine digits, or digits mixed with letters. The rules for a missing TIN start with your first request:

• Ask when you set them up. That’s the initial solicitation. If the sub doesn’t give you a TIN then, you begin backup withholding on reportable payments and continue until they do.
• “Applied For” doesn’t pause it for a sub. A payee who has applied for a number can write “Applied For” on the W-9. For interest and dividends that buys 60 days; for nonemployee compensation it buys nothing, and withholding applies immediately.
• Ask again every year, in writing. To avoid a penalty for filing a 1099 without a TIN, make a first annual solicitation by December 31 of the year you started paying them (January 31 if that was December), and a second by December 31 of the following year.

In practice, this is the backup withholding most GCs meet: a sub who started work before anyone asked for the W-9, paid in full for months, with nothing withheld. How to request a W-9 has the email to send and what a complete form looks like.

A wrong TIN: CP2100 and B notices

When the name and TIN on a 1099 you filed don’t match IRS records, the IRS sends you a CP2100 listing the accounts (a CP2100A when there are fewer than 50). Your job is then to send each listed payee a “B” notice. Which one depends on how many times it has happened:

• Not by phone. The correct name and TIN have to come back in writing; the IRS says they may not be solicited by telephone.
• Mark the envelope “IMPORTANT TAX INFORMATION ENCLOSED” or “IMPORTANT TAX RETURN DOCUMENT ENCLOSED”.
• A returned notice doesn’t pause anything. If the B notice comes back undeliverable, begin withholding and keep looking for a good address.
• Only where your records agree with the IRS list. You send a B notice only to a payee whose name, TIN and account number on your records are the combination the IRS identified as incorrect.

The full procedure, with the notice text you’re required to use, is in IRS Publication 1281.

The $2,000 threshold for 2026

Backup withholding follows the 1099 reporting threshold, and that threshold moved. The IRS’s instructions for Forms 1099-MISC and 1099-NEC say that for tax years beginning after 2025, the minimum amount for reporting certain payments, and for backup withholding on those payments, increased to $2,000, and may be adjusted for inflation from 2027.

So a sub you pay less than $2,000 over 2026 is generally neither 1099-reportable nor subject to backup withholding on those payments. The catch is that you rarely know in March what you’ll pay a sub by December. Ask for the W-9 from everyone at onboarding and the threshold stops being a judgment call. More in the 1099 threshold for 2026.

Depositing and reporting it

• Deposit it on the deposit schedule for nonpayroll withholding.
• Report it once a year on Form 945, the annual return of withheld federal income tax, which covers backup withholding and other withholding outside payroll.
• Show it on the sub’s 1099-NEC as federal income tax withheld, so they can claim the credit.

If you were required to withhold and didn’t, the IRS can hold you liable for the amount you should have collected, on top of any penalty for the 1099 itself. The sub has a penalty of its own: the B notice tells them the IRS may charge $50 for failing to give you a correct name and TIN.

How to avoid it

Every case above starts the same way: a payment went out before a correct name and TIN were on file. Four habits close it:

1. No first payment without a W-9. Make it part of onboarding, with the COI and the license, not part of January.
2. Check the W-9 when it arrives: one classification box, nine digits, and a name that matches the number. What a complete W-9 looks like.
3. Match names and TINs before you file. The IRS’s TIN matching service tells you about a mismatch before the CP2100 does.
4. Keep the record of every ask: date, method, what was requested. It’s what shows you made the solicitations.